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Retirement planning

In our most recent blog post, we discussed the import role that Social Security benefits play in the retirement income plan of most Americans, and provided a framework for understanding the various types of benefits. While sometimes dismissed as inconsequential, Social Security benefits provide a critical source of guaranteed income for most retirees. To wit, Social Security benefits comprise over fifty percent of the retirement income for two-thirds of current retirees and, critically, allow many seniors to live independently. In this blog post, we review how Social Security benefits are taxed and provide guidance on how and when to claim benefits. We encourage readers to review our previous blog post, A Primer on Social Security Benefits, as it provides important information that will aid in your understanding of the strategies outlined below. You can find that blog entry by clicking here.

To begin, an understanding of Social Security retirement benefits requires reviewing a few common terms that are key to making informed claiming decisions.

Social Security benefits represent an important, but often overlooked, component of retirement income planning. As a source of guaranteed income that cannot be liquidated, it is not often thought of as an asset. In fact, it is the single largest financial asset for many retirees, providing benefits for approximately nine in ten individuals age sixty-five and older and covering ninety-six percent of working-age adults.

Aging gracefully is a nearly universal goal. Continuing to enjoy life, having a low risk of disease or disability, and maintaining a high level of physical activity and mental acuity are the hallmarks of successful aging. The process of aging, however, impacts people differently, and leaves a significant portion of older adults vulnerable to deteriorating physical or mental health, rendering some unable to continue to manage their personal and financial affairs. In some unfortunate cases, this can lead to elder abuse. While unpleasant to contemplate, one-third of those age sixty five or older suffer some degree of frailty and these risks increase with age. The good news is that many of the risks associated with aging can be addressed with good planning.

The age at which we retire has traditionally been linked to cultural norms and external factors such as the availability of a company pension, health care and Social Security retirement benefits. Pensions were designed to incentivize long-service with a single employer while also establishing formulas that would provide reliable incentives for employees to eventually retire. While there has been a dramatic shift from a manufacturing economy to one based on the delivery of goods and services, the decision to retire based on attaining a set age remains stubbornly persistent. As the self-funded and self-managed retirement replaces traditional lifetime pensions, fresh thinking has emerged on how to manage the risk of outliving one’s assets. Rethinking retirement as a ratio of working years to leisure years is beginning to gain acceptance as a more thoughtful way of addressing this and other retirement risks.

A thoughtful retirement income plan involves varying degrees of monitoring and oversight to ensure continued success. While this may be readily apparent at the onset of planning, many otherwise well-constructed plans fail to consider what happens if active participation is no longer possible. Planning for mental incompetency is an often overlooked component of planning that can have devastating emotional and financial consequences. Thankfully, it can be proactively addressed through proper planning.

Americans are facing a retirement crisis. And they know it. The story is not a new one, but as larger numbers of the baby-boom generation approach retirement age the extent of the problem is becoming more clear. The 2014 Employee Benefit Research Institute’s Retirement Confidence Survey reports that a mere 13% of workers feel very confident that they have enough money saved for a comfortable retirement. What’s more, these respondents came almost exclusively from higher income households- defined as having an annual income of $75,000 or more. Moving further down the income scale, the results are far worse- 36% of survey respondents with earning under $35,000 per year reported having less than $1,000 saved. Social Security, which makes up the sole source of income for approximately 1 in 5 retirees, and more than 50% of income for 2 in 3 retirees, will become an increasingly important component in the retirement plan of many Americans.

Anyone that has run a marathon knows that it can be a long and punishing journey to the finish line, filled with a slew of physical and mental obstacles along the way. Yet, despite the challenges, or for many of us because of them, participants line up year after year to collect another finisher’s medal.

Sound a little like working as a tax accountant during tax season, or, for that matter, planning for retirement? Well, aside from the finisher’s medal, blood blisters and aching quadriceps. To be successful, all three require endurance, a little luck and the execution of a thoughtful strategy.

Let’s face it, the financial services industry loves analytics. We produce mountains of data and delight in presenting it to clients in new and creative ways. Finance is, after all, a highly analytic field, so it is hardly surprising that we focus our time and energy on numbers. This is the paradigm that is often used to develop and deliver financial advice, but a growing body of evidence suggests that the financial decisions made by most individuals may have less to do with analytics and more to do with behavior and emotions. How do we as advisors strike the appropriate balance between analytics and emotions, and what can the field of behavioral finance teach us that may help our clients to make better financial decisions?

Those approaching retirement are looking for ways to provide lifetime income; a recent ruling from the United States Department of the Treasury has placed renewed attention on the use of deferred income annuities, also known as longevity insurance, in a retirement income plan.

First, A Little Background

Deferred income annuities are generally paid for with a single-premium and income payments commence after a minimum of one year. The recent Treasury ruling allows participants in a 401K or Traditional IRA retirement account to use the lesser of twenty five percent of their account balance or $125,000 for the purchase of a qualifying deferred income annuity. Income from the contract may be postponed up to age eighty five and will be excluded from Required Minimum Distribution calculations.

Turning accumulated assets into a reliable income stream is THE critical issue facing retirees. A growing body of research, and memorable terminology, has provided financial planners with the ability to help our clients create a dynamic income plan that best suits their needs.

While each client has a unique set of circumstances, having adequate income to maintain a given lifestyle in retirement is a near universally shared goal. Likewise, many clients will face similar obstacles and challenges throughout retirement. Our job as advisors is to assist clients in identifying their retirement goals, risks, income sources and expenses, and to combine these to help create an income plan that can be revised and adapted over time. In this blog, we will outline three distinct approaches to retirement income planning.